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More Evidence on the Silliness of Neoclassical Economics

Wednesday, April 15, 2009
The foundational moral psychology of neoclassical economics is that individuals are rational self-interested utility maximizers (or as I will abbreviate it, SIUM). Everybody (including I expect most economists) know that in practice this conception is not just wrong, but almost laughably so. Perhaps the construction of economic models assumes that people will behave as if it's true, leading to aggregate behavior that approximates SIUM - it's behavior we measure, not intentionality. But then there's plenty of evidence that this isn't right either. Bubbles exist because people get irrational. People operate with limited (and frequently wrong) information and are fully capable of projecting what they wish to be true onto reality. But I don't even have to get all that sophisticated to debunk SIUM. How about these 2 examples of patently irrational behavior in precisely those situations when one would suppose individual SIUM to operate?

1. Arlen Specter. Clearly he wants to be re-elected. To win re-election, he must first get re-nominated by a Republican primary electorate that nearly rejected him 6 years ago (he won with 51%) when he had the full backing of the White House and the Republican primary had a bunch of moderates in it. Now the moderates are gone, the White House is Democratic, and obviously Specter is going to have to move right to be re-nominated. So what does he do? Votes for what conservatives view as a socialist stimulus bill. He waffles on the employee free choice act (which conservatives view as socialism too). He's going to have to run so far to the right that even if he wins the primary he's doomed in the general election. He could run as a Democrat or an independent, but he doesn't do that either. Tell me, where is the sense in what Specter is doing?

2. Moving to Dubai and going into debt. You'd think one would research what happens to debtors in a country before moving there and before acquiring a bunch of debt. Now these people are looking at debtor's prison. They could have put money in investment funds focused on Dubai and kept living in Canada. Why in the world would they move there? And why not go home when you started having health troubles? After all, health care in Canada is free. It's ludicrous.

These are just 2 instances that appeared around the internets today, but I'm sure I could write this every day, like some tedious version of the Darwin awards. What I have to wonder is why very intelligent people would base a major theory with profound real-world implications on a concept which is patently ludicrous. It would be like designing a criminal justice system on the theory that people are motivated by the desire to go to jail.
Posted by Arbitrista @ 2:29 PM
  • The talk here with Specter is that he might bolt the party. Given the mess that Santorum caused--republicans are having a tough go of it lately. (especially in the eastern part of the state.) The only ones that gain any support are the xenophobes like Barletta-- and even he lost out when it came down to it.

    Specter had to back the bill---given the economy in PA. Remember--we are 30 years behind and still waiting on roosevelt.

    By Blogger Weezy, at 12:06 PM  
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